For quite some time, the Finance Ministry and the Federal Bank (Reserve Bank) have been locking horns on reducing interest rates in order to reinvigorate the economy and this started well before the exit of the controversial RBI governor Raguram Rajan to continue his academic pursuits. He was steadfast in his decision not to drop the rates as inflation was not down to his satisfaction.

Rajan's successor Urjit Patel too had been keeping the interest rates on a tight leash and did not relent to Finance Ministry pressures although rumours did the round in the North Block that he was their poster boy in the government. Not really. He has proved to be a professional. He too declined to drop interest rates.

Since inflation has now been brought under control, it was no longer possible to ignore the demand of the Finance Ministry to drop lending rates as the industry has been clamouring for it to kick start the manufacturing process and the economy to grow to more than the GDP level of 6% recorded in the last fiscal of FY 2016-17.

So, The Reserve Bank of India (RBI) on Wednesday finally cut interest rates, in line with market expectations. The Repo rate - the rate at the which the central bank lends short-term money to commercial banks - was cut by 25 basis points to bring down interest rate to 6% from 6.25% cent. The RBI's move comes on the back of inflation running well below its target for four consecutive quarters, media reports suggest

The central bank had last cut key rates in October 2016. The current rate of 6% per cent is the lowest since November 2010, according to official sources.

"There is scope for banks to reduce lending rates," RBI governor Urjit Patel said soon after the reduction in what appears to be a disguised directive to commercial banks to pass on the rate cut to consumers , that is by dropping their lending rates.

Official reports claim that a significant moderation in retail inflation over the past three months had actually strengthened calls for further monetary policy easing from the RBI, which changed its stance to neutral from accommodative at the beginning of the year. The central bank on Wednesday had however said it would still retain its neutral stance, because it expected inflation to rise, but was waiting for more economic data.

How did inflation come down during the last several quarters? The real reason is because of the weak consumer spending following the Narendra Modi-government's ban on high-value currency notes of Rs 500 and Rs 1,000 denomination late last year as well as lower food prices which kept inflation well below the RBI's 4% mid-term target for the past eight months. It is claimed by economists that Inflation eased to its slowest pace in more than five years in June.

Economists believe slumping inflation actually allowed the RBI to provide a booster shot to India's economy which has been growing at its slowest pace in over two years. The quantum of cut announced Wednesday last was not unanimous because four members of RBI's monetary policy committee (MPC) voted to cut rates by 25 basis points, one voted for a 50 basis points cut and another voted for leaving rates unchanged.

The RBI also cut reverse repo rate -- the rate at which the central bank borrows money from commercial banks by 25 basis points to 5.75% from 6%. Marginal Standing Facility (MSF) rate -- the rate at which banks borrow overnight funds from RBI against approved government securities -- and the bank rate were also adjusted to 6.25%, media reports show.

Since last Wednesday's rate cut, the RBI has claimed it would be status quo in its policy at least until 2019 because economic growth is set to accelerate, according to a Reuter's poll. Indian stocks have started trading at a record high in anticipation. Media reports quote Arihant Capital's whole time director Anita Gandhi to say, "If RBI gets confirmation that inflation will remain in the lower territory, there is a possibility of a further rate cut."

"The markets had already factored in a 25 basis points cut in rates by the RBI," Sanjiv Bhasin, Executive VP- Market & Corporate Affairs, IIFL is quoted by the timesofindia.com to say. "If banks are to pass it on to consumers, it is likely to happen over a period of time as their margins are already under pressure which is evident from SBI (State Bank of India) cutting deposit rates on savings bank accounts earlier this week. The country's largest lender cut interest rate on savings bank accounts on Monday to 3.5% from 4% on balance of Rs 1 crore and below. About 90% of SBI's savings bank accounts have balances under Rs 1 crore.

Economists liken the situation to a Catch-22 one because for banks margins are a concern, while loan growth continues to be weak and they would feel face pressure to pass on any rate cut to the consumers. In June, SBI cut its lending rate for home loans above Rs 75 lakh by 10 basis points (0.10%). The revised interest rates stand at 8.55% per annum for salaried women borrowers, while for others the rate of interest is 8.60% per annum. This came on the back of RBI reducing the risk weightage on home loans above Rs 75 lakh to 50% from 75%.

In May, the bank cut rates on home loans of up to Rs 30 lakh by 25 basis points (0.25 per cent) for new borrowers in a bid to cash in on the demand generated by the Narendra Modi government's efforts to push for affordable housing. The rate was reduced to 8.35% from 8.60%. It may be recalled that in January this year, the state owned bank had reduced its lending rates making home, auto, personal and others cheaper.

It's expected that lower interest rates will bring down the EMI burden for households, giving them more room to spend, and help companies enhance their borrowings. Inflation has been consistently falling, resulting in a five-year low in June. With the latest count at 1.54%, the retail inflation is below the MPC's target range of 2-6% and the RBI's forecast. The fall could give RBI governor Urjit Patel the "greater clarity" he called for in the last monetary policy review, when he made a case against lowering interest rates to avoid "premature policy action", media reports quote him as saying.

India's economy has been struggling with several odds. Its GDP growth rate slowed to 6.1% in the March quarter - the slowest in two years - because of demonetisation, and credit growth to companies slowed to a trickle as banks were weighed down by bad loans. The June quarter earnings data now also points to a slowdown in some sectors ahead of the introduction of the goods and services tax (GST) on July 1.

Banks, it may be recalled, were largely reluctant to pass on the rate cut announced by the RBI in October 2016. India's real rates - the interest rates at which banks actually sanction loans -have remained above RBI's own assessment range of 1.25-1.75% since the last time the central bank lowered the interest rate. This shows that RBI has room to cut rates without hurting savers, who benefit from the interest on deposits, experts feel.

The gap between RBI's policy rate and the rate path prescribed by the Taylor rule is the widest since March 2015, when the central bank formally adopted inflation targeting. The Taylor rule, credited to Stanford University monetary economist John B Taylor, estimates the desired level of interest rates based on the output and the inflation gap. A widely used benchmark, most Indian policymakers, including RBI officials, have often referred to it in the past.

On the state of the economy, the MPC felt there is an urgent need to reinvigorate private investment, remove infrastructure bottlenecks and provide a major thrust to the Pradhan Mantri Awas Yojana for housing needs of all. On their part, the Government and the Reserve Bank are working in close coordination to resolve large stressed corporate borrowers and recapitalise public sector banks within the fiscal deficit target, economists strongly believe. These efforts should help restart credit flows to the productive sectors as demand revives.

Financial experts and brokerages saw the MPC's decision as expected and on the right track.

"This large Forex reserves eventually will ensure fall in currency premiums and that will result in foreign capital flowing into the economy at substantially lower rates. This will happen as global borrowing rates are subdued and currency risks now tapering off will result in lower rates offered in India, Oswal was quoted by media reports as saying.

Financial experts believe markets are overheated but won't fall; there is a huge cash pile up in the monetary system, waiting to be deployed, which could act as a shock absorber at every weakness. We think long term money should be committed at these levels as well. Barring any global event, the outlook is positive", financial experts said of the rate cut.

It's a positive move in the right direction and at the right time which should keep all quarters happy, both in the private and government sectors.

NEW DELHI, Aug 9 (Agencies): Amid the border standoff with China, Defence Minister Arun Jaitley today said the Indian armed forces are strong enough to meet any challenge to the country’s security as he underlined that lessons have been learnt from the 1962 war.
He also said in the Rajya Sabha that the people of the country have a predominant wish of retrieving the parts of Jammu and Kashmir occupied by Pakistan since 1948.
Jaitley, while initiating a special debate to mark the 75th anniversa